Question: 1. Two stocks, A and B, have the same level of risk. That is, A=1.25 and B=1.25. The return on the market portfolio is RM=12%

1. Two stocks, A and B, have the same level of

1. Two stocks, A and B, have the same level of risk. That is, A=1.25 and B=1.25. The return on the market portfolio is RM=12% and the risk-free rate is RF=2%. a. Stock A's last dividend was D0=$1.25 and its growth rate of dividends in the first period is g= 3%. After the first period the growth rate of dividends is 0%. (i) Find the equilibrium rate of return for A. (5 points) (ii) Find the equilibrium price of A. (5 points) b. Stock B's last dividend was D0=$1.2875 and its growth rate of dividends is 0%. (No growth.) (i) Find the equilibrium rate of return for B. (5 points) (ii) Find the equilibrium price of B. (5 points c. A critical concept in finance is that the price of a security, or any asset, is the present value of future cash flows. How does this relate to the prices of A and B. Explain. Is "A" essentially a no-growth stock? (5 points)

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